21/05/2007
Asset Allocation
With global markets having regained their composure following the bout of uncertainty that struck in late February and early March, we can safely categorise the weakness as a correction rather than the start of an entrenched bear trend.
However, with some markets around the world more vulnerable than others to the volatility that we believe is set to persist over the coming months, careful asset allocation is assuming greater importance.
We believe that in the current environment, property should be an essential part of any cautious managed fund despite recent yield contraction. The absence of any significant correlation with other asset classes and the relative stability of the UK property markets make this an appropriate starting point. While we have some concerns over the outlook for certain areas of UK retail property, particularly high street shops, other sectors, notably the Central London Office market, offer strong return prospects. In addition, the availability of REITs and quoted property companies globally offer exposure to foreign markets without the expense and limited liquidity of direct investment.
The excitement of investing in fixed income markets has been likened to watching paint dry, but there are times when it can have a calming effect. Our view is that this asset class will outperform cash over the medium term, provided inflation and interest rates remain under control. In addition, the supply of corporate bonds is limited and is still falling short of demand.
We believe the UK and Europe will outperform other global developed equity markets for sterling investors. The UK is relatively inexpensive given the strong cashflow, growing dividend payments, share buyback programmes and sustained high levels of M&A activity. This is not confined to any particular sector but is happening in all areas of the market. Dividend growth is expected to exceed earnings growth over the next few years, implying an attractive real return for investors.
A similar situation exists in Europe, which should also continue to perform well. Companies have been extremely active in restructuring their businesses and this has created many stock specific opportunities.
Potentially negative influences for equity markets include the possibility of a sharp slowdown in earnings growth. That said, with the underlying position in defensive markets such as the UK, any dips should present buying opportunities.
Other headwinds might include a larger than expected slowdown in the US economy or policy errors by central banks, most notably the US Federal Reserve.
However, the overall picture remains positive, with any exposure to markets that are underpinned by corporate strength well-placed to deliver further growth over the rest of the year.
Jacquie Kerr, Fund Manager – Dynamic Distribution Fund and Head of Mutual Fund Investments, Standard Life Investments
First published in Investment Week 21 May 2007
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
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